Market Commentary

The North American session started off with a bang as lower-than-expected U.S. claims for jobless benefits triggered a round of risk appetite. The U.S. dollar, Swiss franc and yen fell while the commodity currencies made gains. Later, questions about the validity of the jobless claims data pared much of the moves.

The Australian dollar was the top performer after the employment reported showed 30.9k new jobs in August compared to the 25k gain expected. AUD/USD gapped 50 pips higher and then continued to the upside before later consolidating.

Most risk trades slipped alongside the Australian dollar as trades questioned the drop in jobless claims to 451k from 478k. Due to the Labor Day holiday on Monday, at least 20 states estimated jobless claims. Seasonal adjustments due to Labor Day also may have played a part. The questions helped to reverse much of the early moves.

On the day, the relative size of market moves were small.
 

The euro is ignoring comments from a European central banker saying that economic uncertainty in the euro zone is relatively high. Speaking to reporters in Madrid, Governing Council Member Miguel Angel Fernandez Ordonez said that nearly all economies in the euro zone continue growing below potential, and that there are uncertainties surrounding expectations of an economic recovery in the region. The comments are repeats of what has already been said, and aren’t affecting the euro.
 

The USD is making a bit of a comeback at midday in the North American markets, after news that Deutschebank is considering a €9.0 billion share sale began to weigh on equities. Just 2.5 hours ahead of the U.S. equity close, stocks are returning towards opening levels, giving the USD a boost as the so called “risk trade” remains dominant. EUR/USD last traded lower by 25 pips a 1.2696, while GBP/USD was lower by 29 pips 1.5442. USD/JPY is down only 3 pips at 83.86 and USD/CAD remains lower by 31 pips at 1.0344.
 

The U.S. government paid more to raise funds for 30 years then the market was anticipating and that could help the USD. A $13 billion sale of 30-year bonds will yield 3.820%, more than market participants were anticipating. The yield on the on-the-run bond climbed to 3.824% from 3.784% prior to the news. The bond started the day trading at 3.73%. A one-day move of nearly 10 basis points is rare in the 30-year bond. The result represents diminished demand for safe assets and a growing worry about the long-term U.S. debt situation. Higher U.S. yields will reduce demand for dollar-based carry trades and should help to boost USD.

The euro continues to be under pressure following comments from European Central Bank President Jean-Claude Trichet. Speaking in an interview with the Financial Times, Trichet said it will take time for banks to wean themselves off the cheap liquidity offered by the ECB. He added that the emergency measures were temporary in nature, and would be progressively phased out. All in all, the central banker is not really telling the markets anything they haven’t heard before so the euro is not reacting to the news. EUR/USD last traded lower by 18 pips at 1.2703 after trading between 1.2766 and 1.2665 so far today.
 

The Canadian dollar continues to strengthen against the USD and euro ahead of the critical employment report on Friday morning.

Released at 7 a.m. EDT on Friday, economists expect the Canadian economy to have created 30.0k jobs in August, reversing a 9.3k contraction the month prior.

The unemployment rate is projected to remain unchanged at 8.0%.

Details of the report will also be closely watched seeing as in July, Canada lost 139k full time positions, while part time employment advanced by 129.7k.

July’s losses were attributed to a plunge in teaching positions, a development which is not expected to translate into the August data, according to some economists.

Given the importance of employment to the Canadian economy, the publication of the data provides a good opportunity for FX traders to capitalize on the news.

The reaction to a better than expected number should be fairly straight forward, with the loonie continuing to extend its gains against majors. Usually the net change in employment is the most important part of the report, though a lot of attention will also be given to the unemployment rate and full time job creation if any.

Throughout the week USD/CAD and EUR/CAD have been under pressure as the loonie benefitted from some stronger than expected economic data out of the United States, coupled with some unexpected hawkishness from the Bank of Canada, which failed to signal that it would stop hiking rates after this week’s 25 bps hike to 1.00%.

As it stands, USD/CAD is currently at its lowest levels since August 19 and EUR/CAD is at its weakest levels since July 14, coming off a five-day sell off (implying Canadian dollar strengthening).

In both cases there the technical momentum continues on the downside, and a stronger than expected employment report will only serve to strength the declines.
 

Nymex crude oil hit a session high of $75.88 per barrel after a U.S. inventory report showed oil stockpiles falling 1.8 million barrels in the week ending September 3. Economists were expecting a supply build of 1 million barrels after a 3.4 million barrel increase the week earlier.

The Canadian dollar has benefitted from strong risk appetite and the rise in oil. USD/CAD is down 69 pips to 1.0307, just above the session low.
 

A poll in Poland shows a drop in the number of people supporting the nation’s ambitions to join the eurozone. About 47% of survey respondents to a Ministry of Finance poll said they are against the idea, up from 43% a year ago.

Poland had hoped to join the euro in 2012 but the credit crisis ballooned deficits and the target date was pushed back to 2015. The growing opposition in Poland is perhaps a sign of the dimming reputation of the euro. This is especially true in periphery nations, like Spain and Greece where unemployment has climbed during the crisis. “Poles are mainly concerned that euro adoption will hamper their financial standing, boost process and increase poverty,” the Ministry of Finance said.

Canada’s trade deficit hit a record high of $2.7 billion in July, far exceeding the $0.8 billion expected by economists. The July deficit was also revised higher to $1.8 billion from $1.1 billion. Canadian exports fell in the month to $32.8 billion from $33.0 billion with machinery and forestry lagging. Exports to the U.S. fell while sales to EU countries and Japan climbed. There was an unexpected climb in imports, especially from the United States. Energy imports climbed by 11.9% in the month, to make up a large portion of the $700 million rise in imports.

A separate report released at the same time showed signs of weakening in the Canadian housing market. Housing starts in August fell to 183.3k from 189.2k the prior month. Economists expected a 185.0k figure. In addition, the July new house price index fell 0.1% compared to the +0.1% expected.

Despite the disappointing round of Canadian data, CAD remains an outperformer. USD/CAD gained after the report but later touched off a session low due to unexpectedly strong U.S. jobless claims. On the session, USD/CAD is down 55 pips to 1.0320.
 

The euro continues to be under pressure on the back of fears regarding the region’s banking system, says a research note from RBC Capital Markets. “We are smoothing our EUR/USD profile by nudging up the year-end forecast as we think negative-EUR fiscal and political risk is likely to be slower to crystallise than we previously thought (and than some might anticipate),” explains the report. “With periphery governments appearing unwilling to provision in their Autumn budgets for the 2011 downside risks and with redemptions light until the end of the year, we expect the unavoidable reckoning to take place in H1 2011. This may seem to fly in the face of the most recent spell of EUR weakness where the periphery already appears to have taken centre stage but the drivers so far are flimsy and we do not think we will see the bulk of EUR-independent weakness until Q1 of next year. In the near-term, we expect a USD recovery across the board to send EUR/USD lower with independent EUR weakness carrying us through to our end-Q2 2011 target of 1.10.
 

The Canadian dollar is among the day’s top performers following the central bank’s decision to hike interest rates, says a research note from Scotia Capital on Thursday. “CAD remains in the upper echelon of currency performers today following yesterday’s Bank of Canada rate announcement, up 0.4% against the USD,” begins the report. “The tone in the Bank’s statement leaves one with the same sense that held following the previous policy statement, that the Bank still considers monetary conditions to be extremely stimulatory, but that the uncertainty in recovery momentum introduces hesitancy regarding the future pace of monetary tightening… CAD should be fairly restrained ahead of tomorrow’s crucial unemployment data, as inflation, growth and employment developments are of great importance to a BoC that seems to be on the fence regarding the pace of future policy tightening.”
 

Japanese officials are likely to launch an initiative to weaken the yen if the currency continues gaining, says a research note from the Bank of New York Mellon on Thursday. “Regular readers will be aware that we have made the case for the MOF entering into a campaign of unilateral intervention to fight the continued demand for the JPY noted above,” explains the report. “The only questions that need to be asked (as far as we are concerned) are, firstly, can the MOF intervene without invoking international disapproval and, secondly, will their campaign prove successful? With regard to the first question, given G7’s warnings about the dangers of “excess volatility,” the MOF will likely need to see a large daily move for them to justify stepping in (something in the order of 2% seems about right). However, it seems unlikely that they will escape the disapproval of the US (this is certainly how we take Secretary Geithner’s comments overnight).With regard to the second question we simply recommend watching and waiting to see how the first few rounds of cat and mouse play out.”
 

The USD is selling off against all but the Japanese yen in the aftermath of a much stronger than expected pullback in initial jobless claims.

According to the U.S. Labor Department, initial jobless claims in the week ending September 4 fell to 451k, from 478k further than expectations from a contraction to 470k.

Meanwhile continuing claims for the week ending August 28 declined to 4478k from 4480k the week prior, less than calls for 4450k level.

In line with a rally in U.S. equity futures, the news bolstered EUR/USD, GBP/USD, AUD/USD and weakened USD/CAD as traders sold their U.S. dollar denominated assets to seek riskier investments aboard.

Only USD/JPY advanced on the news.

The market reaction suggests that the so called “risk trade” is firmly in control rather than the conventional economic theory which suggest that a stronger than expected decline in unemployment claims should have boosted the USD through better economic fundamentals.

Simultaneously released, but evidently ignored was, a smaller than expected trade deficit for the United States. The national deficit shrank to $42.8 billion in July from $449.8 billion the month prior. Expectations had been for a $47.0 billion level.

Exports were up 1.8% month-over-month, offsetting a 1.3% contraction in June, and imports declined 2.1% versus a 3.1% pickup previously.

Although the trade data should have theoretically strengthened the greenback, the markets are firmly focusing on the employment data, the hot topic in the United States.

EUR/USD popped 18 pips to an intraday high of 1.2746 on the news, while AUD/USD added 14 pips to an intraday high of 0.9267 on the news.

USD/JPY surged 22 pips to 83.88.

Given the lack of additional economic data from the U.S. on Thursday, the equity markets could be the main driver for the rest of the day, with the greenback continuing to gain on the back of weakness in stocks.

The Australian dollar is far and beyond the top performer of the day in the aftermath of solid employment statistics published earlier on Thursday.

Earlier on Thursday, the Australian Bureau of Statistics reported that the economy created 30.9k jobs in August, much more than the expected 25.0k gain and the prior 25.0k increase.

The unemployment rate dropped to 5.1%, further than expectations for a decline to 5.2% from 5.3%.

Details of the report were also very strong with 53.1k full time jobs created compared to the prior month’s 9.6k decline, while part time employment fell 22.1k after a 34.6k increase in July.

The news sparked a solid rally in the Australian dollar with AUD/USD popping 52 pips to 0.9223, in the minutes following the announcement. The pair has continued to rally throughout the day, hitting an intraday high of 0.9261, its best levels since May 4.

From a technical standpoint, the momentum behind AUD/USD remains clearly bullish with the pair broadly ascending higher since August 25th’s 0.8771 low, bolstered by some very upbeat economic data over the last several weeks.

The pair is now gearing up to test some heavily congested resistance levels from April and May, culminating in the April 12th high of 0.9389.

On the flip side, this week’s interest rate decision from the Reserve Bank of Australia continued to highlight uncertainties surrounding the global economy, so it may take some additional upbeat economic news to push the central bank towards hiking interest rates, and sending the Australian dollar even higher.
 

The yen is making some headway against the USD on the back of conflicting reports following a meeting between Bank of Japan and government officials on Thursday.

Speaking to reporters in Tokyo after the meeting, Japanese Finance Minister Yoshihiko Noda said some attendees expressed concerns over the potential negative impacts of the currency’s strength on the broader export-heavy economy.

Allegedly Japan is conducting simulations to judge whether FX interventions would be successful, he added.

Although USD/JPY initially rallied on the news, the gains were quickly reversed after Bank of Japan Governor Masaaki Shriakawa told reporters that the yen had not been discussed, with policy makers focusing the conversation on how to stimulate Japan’s ailing economy.

Shirakawa also defended the central bank’s cap on government bond purchases, arguing that it helped prevent moral hazards regarding the central bank funding government spending.

All in all, the comments have left traders once again convinced the government is not close to acting to weaken the Japanese currency any time soon.

In line with the view, USD/JPY is down 15 pips at 83.73, after trading between 83.50 and 84.03.

Wednesday’s 83.35 15-year low is the next significant support to breach before the pair can resume its trek towards the all time low of 79.75.
 

Sterling is the day’s top underperformer on Thursday, fairly to capitalize on some modest gains in the equity markets, in the aftermath of a weaker than expected trade balance.
 

The visible trade deficit widened to £8667 million in July, despite calls for a decline to £7500 million from £7532 million the month prior.
 

Details of the report were also downbeat with exports falling to £22,254 million in July from £22,465 million the month prior, while imports rose to £30,921 million from £29,997 million.
 

GBP/USD dropped 36 bps to a fresh intraday low of 1.5376 on the news, and last traded lower on the day by 72 pips at 1.5397.
 

The currency also failed to react to the Bank of England leaving its monetary policy unchanged as expected, with rates at 0.50%, and the Asset Purchase Facility at £200 billion.
 

The lack of reaction is not surprising seeing as the move was fully priced in by the markets, and the Bank of England doesn’t release a statement explaining the decision when monetary policy is left unchanged.
 

Consequently, traders will have to wait until the release of the minutes from the meeting on September 22, for additional clues on rates.
 

From a technical standpoint, GBP/USD has been very choppy over the last several days with the pair trading as low as 1.5294 on September 7 (the lowest since July 23) and 1.5533 on September 8, the highest since August 30. All in all, as such, the broader momentum looks fairly neutral, in a bit bearish.
 

In The News

The Australian dollar is far and beyond the top performer of the day in the aftermath of a very strong employment report on Thursday, while the euro and pound sterling lagged behind the USD.
 

The Australian dollar was up 0.7% in the aftermath of news that the economy created 30.9k jobs in August, much more than the expected 25.0k gain and the prior 25.0k increase. The unemployment rate dropped to 5.1%, further than expectations for a decline to 5.2% from 5.3%.
 

Details of the report were also very strong with 53.1k full time jobs created compared to the prior month’s 9.6k decline, while part time employment fell 22.1k after a 34.6k increase in July.
 

Over in Europe, the euro failed to capitalize on some modest gains in the equity markets, and the pound sterling is the day’s main underperformer in the aftermath of a weaker than expected trade balance.
 

The visible trade deficit widened to £8667 million in July, despite calls for a decline to £7500 million from £7532 million the month prior.
 

The currency failed to react to the Bank of England leaving its monetary policy unchanged as expected, with rates at 0.50%, and the Asset Purchase Facility at £200 billion.
 

The yen is making some headway against the USD on the back of conflicting reports, with Bank of Japan Governor Masaaki Shriakawa telling reporters after a meeting with finance ministry officials that the yen had not been discussed, while Finance Minister Yoshihiko Noda said some at the meeting expressed concerns over the currency’s strength.
 

Allegedly Japan is conducting simulations to judge whether FX interventions would be successful.
 

As traders turn to the North American session, the docket looks rather quiet with the U.S. trade balance and weekly jobless claims the only noteworthy events of the day.